How managed funds work

In a managed fund, your money is pooled together with other
investors. An investment
manager then buys and sells shares or other assets on
your behalf.

You are usually paid income or 'distributions' periodically. The
value of your investment will rise or fall with the value of the
underlying assets.

The investment manager may be called a 'fund manager' or
'responsible entity'.

Exchange traded funds

Exchange traded funds (ETFs) are another type of managed fund
that can be bought or sold on a secondary market such as the
Australian Securities Exchange (ASX) listing market or the ASX
Quoted Assets (AQUA) market. For more information, see exchange traded funds.

Listed investment companies

Listed investment companies (LICs) are a type of investment,
incorporated as companies and listed on a stock exchange such as
the Australian Securities Exchange (ASX). Like managed funds,
they have a manager who is responsible for selecting and managing
the company's investments. See listed investment
companies for more information.

Pros and cons of managed
funds

Can access a broad range of assets or markets with a relatively
small amount of cash

Allow you to make regular contributions

Reduce paperwork and make completing your tax return
easier

However, depending on the type of managed fund you choose, the
convenience may come at a price, as:

You may be charged higher fees than other investment types,
though fees vary widely (for example, exchange traded funds often
have lower fees than traditional managed funds)

You may not be able to convert your investment to cash when you
want to

You rely on the skills of other people and do not control
investment decisions

Active vs passive
investing

Actively managed funds

Actively managed funds are those where the fund manager aims to
outperform the market by frequently buying and selling securities
that they think are going to do better than others.

Actively managed funds are more expensive as you are paying for
the investment skills of the fund manager. Unfortunately actively
managed funds rarely consistently outperform the market and any
extra profits are often outweighed by extra fees paid to the fund
manager.

Actively managed funds are suitable for investors that want to
concentrate on certain sections of the market or who want more
control over the assets they invest in.

Passive investing

Passive investment funds, also known as index funds, simply buy
a portfolio of assets that mimic an index, such as the all
ordinaries index or the S&P200 index. Index funds generate a
return, before fees, that is almost the same as the index it is
tracking (some funds may have timing delays).

Index funds are cheaper as you are not paying for investment
expertise.

Investors wanting to invest directly in an index fund have a
limited choice of fund managers in Australia, however some exchange
traded funds are essentially index funds and they have the
advantage of being traded on the ASX.

Steps to invest in a managed
fund

Managed funds can be bought directly from the fund manager,
through a financial adviser or an online broker.

Managed funds may be suitable for people who
want to diversify their investments and rely on the skills of
investment managers to make the investment decisions. Before you
sign up be mindful of the fees and always read the product
disclosure statement. If the investment is sold on a secondary
market such as the ASX, make sure you keep track of any relevant
market announcements.